Porter's 5 Forces
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What you will learn in this Section ? •
•
•
•
Envisioning Strategy – Definition – Framework – Visual Models External Analysis – PEST – PEST Impact Analysis Industry and Competitive Analysis – Industry Structure – Evolution of Industries – Industry Supply Chain – Potential Industry Earnings – Porter’s 5 Forces Analysis – Competitive Intensity – Strategies for minimizing competitive forces – Perceptual Map – Barriers to Entry/Incumbency advantages – DSIR effect Company Resources and Capabilities – ARC Analysis/HR – SWOT Analysis – Value Creating Processes/Core Competencies – Strategic Gameboard – Balanced Scorecard – Change Management
© Sunil Mehrotra
Industry Analysis Why are some industries more profitable than others? Industry Ranking % ROE 90 80 70 60
% ROE
50 40 30 20 10 0 Foreign Regional Banks Management Services Telecom Services - Foreign Jew elry Stores Discount, Variety Stores Tobacco Products, Other Application Softw are Gas Utilities Oil & Gas Drilling & Exploration Personal Products
Industry
Fortune's ranking of Industries by profits
Industry Analysis: Porter's Insight
•
w Ne
nt tra n e
Suppliers
Competitive rivalry The incumbent firms
Substitutes
Porter’s insight recognizes that the following characteristics are important to profitability of the incumbent: The intensity of competition The ability of suppliers or buyers of industry products to restrain industry profits The behavior of firms producing closely related goods not included in the industry Potential for entry into the market by new firms
Customers
© Sunil Mehrotra
Porter's 5 Forces impact on profitability Bargaining power of w Ne
Suppliers
t an r t en
Threat of New Entrants
Competitive rivalry The incumbent firms
Bargaining power of
Customers
Substitutes
Threat from Substitutes
Root causes that put pressure on industry profitability Few large suppliers No substitutes Customers are fragmented Switching costs to another supplier are high Supplier integrating forward Economies of scale Downstream more profitable Low barriers to entry downstream
Low barriers to entry
Bargaining power of
w Ne
Competitive rivalry Suppliers
The incumbent firms
t an r t en
Threat of New Entrants Concentration of buyers Incumbents are fragmented Product is undifferentiated Switching to another supplier is simple Product is not strategic to the customer Customers can produce the product themselves Customer knows the production costs Customers can integrate back-words
Bargaining power of
Many small players High cost to exit Undifferentiated products compete on price Low brand loyalty Low switching costs Slow/no growth market
Customers
Substitutes © Sunil Mehrotra
Threat from Substitutes
Better prices Better performance Similar functionality
www.themanager.org
Impact on Profitability Threat/Power Discount Stores High
Moderate
Tobacco Industry Low
Competitive Intensity Bargaining power of Suppliers Bargaining power of Customers Threat of New Entrants
Threat from Substitutes
Profits
© Sunil Mehrotra
Porter's 5 Forces impact on profitability Bargaining power of w Ne
Suppliers
Competitive rivalry The incumbent firms
Substitutes
t an r t en
Threat of New Entrants
Threat from Substitutes
Bargaining power of
Customers
Low
Competitive Intensity impacts Industry profitability http://www.usdoj.gov/atr/public/testimony/hhi.htm HHI
High
1000-1800
Perfect Competition Niche Market •Product Differentiation •Localized competition •Few Firms Clothing Stores •Strategic Interdependence Gas Stations •Profitability determined by behavior
Oligopoly
•Many firms •No product differentiation •Price based competition Commodities
Dominant Firm
Monopoly Single Firm Utilities
•Few large firms •More small firms •Pricing leadership •Protected Niches
Automobiles Commercial Aircrafts
Computer OS
Industry Profitability Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
© Sunil Mehrotra
Strategies for minimizing the power of competitive forces
Competitive rivalry Reducing competitive rivalry within Differentiate your product Avoid price competition Reduce industry over capacity Focus on different customer segments
The incumbent firms
Adapted from: www.themanager.org
Product Differentiation minimizes competitive intensity • • • •
Perceptual Maps are a visual display (usually on two dimensions) of how brands are perceived by customers. The closer the brands are positioned in this space the more competitive they are to each other. Perceptual Maps identify “open spaces” or unmet customer needs. Perceptual Maps identify salient attributes of the products on which consumers differentiate brands.
Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping
Perceptual Map for Travel Agency Industry Online self-service
Guided tours
Extreme Adventure
In person, concierge service
Perceptual Map of the Auto Industry Prestige
Sporty Conservative
Basic
Perceptual Map Example: Contemporary
Zara
Discount
Expensive
Classic Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Perceptual Map Example: Contemporary
Zara
Young
Mature
Classic Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Perceptual Map of the Beer Market Heavy
Heavy
Full Bodied
•
Old Milwaukee
Budweiser
•
Meister Brau
•
Good Value
Popular with Men
Miller Blue Collar
•
Beck’s
•
•
Stroh’s
Budget
• Heineken
Special Occasions Coors
•
Dining Out
Premium
Premium
• Michelob •
On a Budget
•
Pale Color
Old Milwaukee Light
Light
Miller Lite Light
•
Coors Light
Popular with Women
Less Filling Adapted from: Prof. Ganesh Iyer, UC Berkeley
Perceptual Map of 2000 Presidential Candidates Leader
Colin Powell John McCain George W. Bush
Traditional Liberal
Religious Conservative
Bill Bradley Alan Keyes Elizabeth Dole Steve Forbes
Al Gore
Pat Buchanan Donald Trump Jesse Jackson
Republican Democrat Independent
Opportunistic Source: 12Americans.com, 2000 www.populus.com
Why Differentiation is an effective strategy Differentiation
Competitive Intensity
Brand loyalty to keep customers from switching
Bargaining power of Suppliers
Better able to pass on supplier price increases to customers
Bargaining power of Customers
Fewer alternatives available to switch to
Threat of New Entrants
Customer loyalty can deter new entrants
Threat from Substitutes
Customers less willing to accept substitutes
Example: www.studymarketing.org
Effective differentiation is when a product/brand occupies a piece of the customer’s mind
That is the hook !
Strategies for minimizing the power of competitive forces Reducing the threat of New Entrants Increasing minimum efficient scales of operations Creating brand image/loyalty Protection of intellectual property Alliances with linked products/services Tie up with suppliers Tie up with distributors Retaliation tactics Cut out intermediaries
Reducing the Bargaining Power of Suppliers Partnering Supply Chain Management Increase mutual dependency Build knowledge of supplier costs/methods Take-over supplier
Bargaining power of Suppliers
w Ne
t an r t en
Competitive rivalry Suppliers Reducing competitive rivalry within Differentiate your product Avoid price competition Reduce industry over capacity Focus on different customer segments
The incumbent firms
Threat of New Entrants
Reducing the Bargaining Power of Customers Partnering Increase loyalty Increase incentives and value added Increase switching costs Cut out intermediaries
Bargaining power of
Customers
Substitutes
Threat from Substitutes
Reducing threat of substitutes Increase switching costs Form alliances Enter substitute market Accentuate differences
Adapted from: www.themanager.org
Porter's 5 Forces impact on profitability Bargaining power of Suppliers w Ne
Suppliers
t an r t en
Threat of New Entrants
Competitive rivalry The incumbent firms
Bargaining power of
Customers
Substitutes
Threat from Substitutes
Nappies 14-16? Porter's 5 forces insight -Intensity of competition amongst incumbents -Bargaining power of suppliers and buyers - Threat from substitutes and new entrants
Spectrum of competition-monopoly to perfect competition -Herfindahl-Hirschman index measure of intensity -strategies for minimizing intensity of competition Product and brand differentiation is a key strategy -Perceptual mapping technique -Using perceptual maps for positioning products and brands
Mnemonic 5
Mnemonic 6
Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping
•
•
•
Envisioning Strategy – Definition – Framework – Visual Models External Analysis – PEST – PEST Impact Analysis Industry and Competitive Analysis – Industry Structure – Evolution of Industries – Industry Supply Chain – Potential Industry Earnings – Porter’s 5 Forces Analysis – Competitive Intensity – Strategies for minimizing competitive forces – Perceptual Map – Barriers to Entry/Incumbency advantages – DSIR effect Company Resources and Capabilities – ARC Analysis/HR – SWOT Analysis – Value Creating Processes/Core Competencies – Strategic Gameboard – Balanced Scorecard – Change Management
© Sunil Mehrotra
Industry Analysis Why are some industries more profitable than others? Industry Ranking % ROE 90 80 70 60
% ROE
50 40 30 20 10 0 Foreign Regional Banks Management Services Telecom Services - Foreign Jew elry Stores Discount, Variety Stores Tobacco Products, Other Application Softw are Gas Utilities Oil & Gas Drilling & Exploration Personal Products
Industry
Fortune's ranking of Industries by profits
Industry Analysis: Porter's Insight
•
w Ne
nt tra n e
Suppliers
Competitive rivalry The incumbent firms
Substitutes
Porter’s insight recognizes that the following characteristics are important to profitability of the incumbent: The intensity of competition The ability of suppliers or buyers of industry products to restrain industry profits The behavior of firms producing closely related goods not included in the industry Potential for entry into the market by new firms
Customers
© Sunil Mehrotra
Porter's 5 Forces impact on profitability Bargaining power of w Ne
Suppliers
t an r t en
Threat of New Entrants
Competitive rivalry The incumbent firms
Bargaining power of
Customers
Substitutes
Threat from Substitutes
Root causes that put pressure on industry profitability Few large suppliers No substitutes Customers are fragmented Switching costs to another supplier are high Supplier integrating forward Economies of scale Downstream more profitable Low barriers to entry downstream
Low barriers to entry
Bargaining power of
w Ne
Competitive rivalry Suppliers
The incumbent firms
t an r t en
Threat of New Entrants Concentration of buyers Incumbents are fragmented Product is undifferentiated Switching to another supplier is simple Product is not strategic to the customer Customers can produce the product themselves Customer knows the production costs Customers can integrate back-words
Bargaining power of
Many small players High cost to exit Undifferentiated products compete on price Low brand loyalty Low switching costs Slow/no growth market
Customers
Substitutes © Sunil Mehrotra
Threat from Substitutes
Better prices Better performance Similar functionality
www.themanager.org
Impact on Profitability Threat/Power Discount Stores High
Moderate
Tobacco Industry Low
Competitive Intensity Bargaining power of Suppliers Bargaining power of Customers Threat of New Entrants
Threat from Substitutes
Profits
© Sunil Mehrotra
Porter's 5 Forces impact on profitability Bargaining power of w Ne
Suppliers
Competitive rivalry The incumbent firms
Substitutes
t an r t en
Threat of New Entrants
Threat from Substitutes
Bargaining power of
Customers
Low
Competitive Intensity impacts Industry profitability http://www.usdoj.gov/atr/public/testimony/hhi.htm HHI
High
1000-1800
Perfect Competition Niche Market •Product Differentiation •Localized competition •Few Firms Clothing Stores •Strategic Interdependence Gas Stations •Profitability determined by behavior
Oligopoly
•Many firms •No product differentiation •Price based competition Commodities
Dominant Firm
Monopoly Single Firm Utilities
•Few large firms •More small firms •Pricing leadership •Protected Niches
Automobiles Commercial Aircrafts
Computer OS
Industry Profitability Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001
© Sunil Mehrotra
Strategies for minimizing the power of competitive forces
Competitive rivalry Reducing competitive rivalry within Differentiate your product Avoid price competition Reduce industry over capacity Focus on different customer segments
The incumbent firms
Adapted from: www.themanager.org
Product Differentiation minimizes competitive intensity • • • •
Perceptual Maps are a visual display (usually on two dimensions) of how brands are perceived by customers. The closer the brands are positioned in this space the more competitive they are to each other. Perceptual Maps identify “open spaces” or unmet customer needs. Perceptual Maps identify salient attributes of the products on which consumers differentiate brands.
Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping
Perceptual Map for Travel Agency Industry Online self-service
Guided tours
Extreme Adventure
In person, concierge service
Perceptual Map of the Auto Industry Prestige
Sporty Conservative
Basic
Perceptual Map Example: Contemporary
Zara
Discount
Expensive
Classic Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Perceptual Map Example: Contemporary
Zara
Young
Mature
Classic Nina Tooley, April 2008 MBA, Graziadio School of Business and Management Pepperdine University
Perceptual Map of the Beer Market Heavy
Heavy
Full Bodied
•
Old Milwaukee
Budweiser
•
Meister Brau
•
Good Value
Popular with Men
Miller Blue Collar
•
Beck’s
•
•
Stroh’s
Budget
• Heineken
Special Occasions Coors
•
Dining Out
Premium
Premium
• Michelob •
On a Budget
•
Pale Color
Old Milwaukee Light
Light
Miller Lite Light
•
Coors Light
Popular with Women
Less Filling Adapted from: Prof. Ganesh Iyer, UC Berkeley
Perceptual Map of 2000 Presidential Candidates Leader
Colin Powell John McCain George W. Bush
Traditional Liberal
Religious Conservative
Bill Bradley Alan Keyes Elizabeth Dole Steve Forbes
Al Gore
Pat Buchanan Donald Trump Jesse Jackson
Republican Democrat Independent
Opportunistic Source: 12Americans.com, 2000 www.populus.com
Why Differentiation is an effective strategy Differentiation
Competitive Intensity
Brand loyalty to keep customers from switching
Bargaining power of Suppliers
Better able to pass on supplier price increases to customers
Bargaining power of Customers
Fewer alternatives available to switch to
Threat of New Entrants
Customer loyalty can deter new entrants
Threat from Substitutes
Customers less willing to accept substitutes
Example: www.studymarketing.org
Effective differentiation is when a product/brand occupies a piece of the customer’s mind
That is the hook !
Strategies for minimizing the power of competitive forces Reducing the threat of New Entrants Increasing minimum efficient scales of operations Creating brand image/loyalty Protection of intellectual property Alliances with linked products/services Tie up with suppliers Tie up with distributors Retaliation tactics Cut out intermediaries
Reducing the Bargaining Power of Suppliers Partnering Supply Chain Management Increase mutual dependency Build knowledge of supplier costs/methods Take-over supplier
Bargaining power of Suppliers
w Ne
t an r t en
Competitive rivalry Suppliers Reducing competitive rivalry within Differentiate your product Avoid price competition Reduce industry over capacity Focus on different customer segments
The incumbent firms
Threat of New Entrants
Reducing the Bargaining Power of Customers Partnering Increase loyalty Increase incentives and value added Increase switching costs Cut out intermediaries
Bargaining power of
Customers
Substitutes
Threat from Substitutes
Reducing threat of substitutes Increase switching costs Form alliances Enter substitute market Accentuate differences
Adapted from: www.themanager.org
Porter's 5 Forces impact on profitability Bargaining power of Suppliers w Ne
Suppliers
t an r t en
Threat of New Entrants
Competitive rivalry The incumbent firms
Bargaining power of
Customers
Substitutes
Threat from Substitutes
Nappies 14-16? Porter's 5 forces insight -Intensity of competition amongst incumbents -Bargaining power of suppliers and buyers - Threat from substitutes and new entrants
Spectrum of competition-monopoly to perfect competition -Herfindahl-Hirschman index measure of intensity -strategies for minimizing intensity of competition Product and brand differentiation is a key strategy -Perceptual mapping technique -Using perceptual maps for positioning products and brands
Mnemonic 5
Mnemonic 6
Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping
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